GMP Equalisation and Conversion. Russell Laver 28 November 2013. Agenda. GMP Reminder Equalisation Timeline GMP conversion Questions/Discussion. Guaranteed Minimum Pension (GMP). GMP – minimum pension for employees who were contracted out of SERPS between 6 April 1978 and 5 April 1997.
28 November 2013
GMP – minimum pension for employees who were contracted out of SERPS between 6 April 1978 and 5 April 1997.
Broadly equivalent to the amount the member would have received had they not been contracted out.
GMPs are unequal between men and women.
Inequalities mirror those of SERPS:-
Barber Case – UK Pension Schemes have to pay equal benefits to men and women from 17 May 1990
Most final salary schemes have not equalised GMP
Two calculations for each GMP payment
The highest figure at each date a payment is due is taken to be the correct GMP
Put simply……. Convert a GMP benefit into a non GMP benefit
GMP conversion could be used alongside GMP equalisation and could be used to provide clarity on GMP benefits and reduce future administrative costs.
Section 14 of Pensions Act 2007 allows schemes to amend their rules to convert GMPs into ordinary benefits subject to a few requirements.
Process for GMP conversion exists in sections 24A to 24H of the Pension Schemes Act 1993.
Section 24B – The 5 conversion conditions
Post conversion benefits must be at least ‘actuarially equivalent’ to pre conversion benefits
If in receipt of pension then no reduction
Cannot convert into money purchase benefits
Must provide survivors benefits
Must comply with the procedural requirements of section 24E
Regulation 69A of Contracting Out Regulations 1996 gives some guidance for trustees
Actuary calculates the post conversion rights ignoring:-
Section 24D states after conversion spouse entitled to:-
50% of pension earned between 6 April 1978 and 5 April 1997
Widowers or civil partners
50% of pension earned between 6 April 1988 and 5 April 1997
The employer must consent to the GMP conversion in advance.
Trustees must take reasonable steps to consult earner in advance
Trustees must take reasonable steps to notify all members and survivors affected by the conversion before or as soon as is reasonably practicable after the conversion date.
HMRC must be notified on or before the conversion date
Section 24G - Trustees of an occupational pension scheme may by resolution modify it so as to effect GMP conversion.
Amendments are outside of section 67 of PA 95.
Trustees can convert GMP under the scheme before completion of a winding up.
If conditions of section 24B not satisfied the Pensions Regulator has the power to void amendments.
Draft legislation due in 2014 may highlight the role of GMP conversion.
Helpful for schemes which are winding up.
Can be used to reduce administrative burden and cost.
Increased member flexibility.
Makes benefits easier for members to understand.
28 November 2013
What does it replace?
Existing Financial Reporting Standards (FRSs)
Statements of Standard Accounting Practice (SSAPs)
IFRIC interpretations (where appropriate)
This includes FRS 17
What is FRS 102?
Listed companies in the European Economic Area (EEA)
Required to apply EU-adopted IFRS (i.e. IAS 19) for consolidated financial statements
Listed companies with no subsidiaries may use UK GAAP
Includes those companies listed on the Alternative Investment Market (AIM)
Unlisted companies and subsidiaries of listed companies
“Employee benefits are all forms of consideration given by an entity in exchange for
service rendered by employees”
Mandatory for accounting periods beginning on or after 1 January 2015
Early application allowed for periods ending on or after 31 December 2012
Early adoption applies to the whole of the accounts
Under FRS 17 the cost of a defined benefit plan consists of the:
Net impact is recognised in profit or loss
Use full defined benefit accounting unless “unable to identify its share of the underlying assets and liabilities in the scheme on a consistent and reasonable basis”
The multi-employer ‘exemption’ was widely adopted
Could avoid recognising share of surplus / deficit
Accounted for defined benefit pensions on a defined contribution basis
Many multi-employer plans will need to show a pension liability for the first time
Potential for bank covenants to be breached
Negotiation of recovery plans now even more sensitive
A surplus can only be recognised through
Very restrictive in particular for closed schemes
FRS 17 disclosures requirements already based on ‘old’ IAS 19
FRS 102 does not follow ‘revised’ IAS 19
Much simplified disclosures framework
Very few qualitative disclosures
Plans with more than one employer will have additional disclosure requirements
The terminology of the international standards has been adopted
The balance sheet is now the ‘statement of financial position’
The P&L is the ‘statement of comprehensive income’
The STRGL is now the OCI
Actuarial gains and losses are ‘remeasurements’
Liabilities are the ‘Defined Benefit Obligation’
What standards are clients planning on adopting?
Will they need us to do more than just pensions?
First comparative year starts in a month!
Groups will need to consider how to allow for the changes
Those participating in multi-employer plans need to consider